Stock Market Week: Reuters' share price signals tougher competition and sales slowdown
Monday 10 February 1997
Of course, when it is caught on the hop by an unexpectedly good - or bad - set of figures there is a predictably violent share price reaction. But when shares move ahead of figures there is a strong chance the market has sensed what is in store and has merely made the necessary adjustments over a few weeks or even months.
The Reuters share price has been signalling disappointment since October when the news information group produced reasonably encouraging quarterly figures. Then the shares were riding at around their 806p peak. Since then they have had an uncomfortable time, On Friday they closed at 642.5p, a 12-month low.
So not many City professionals expect much excitement when Reuters produces last year's figures tomorrow.
The City probably feels it is in a remarkably perceptive position to read Reuters. After all, it is a big user of the group's terminals, with many firms relying heavily on its news coverage, sophisticated data and dealing facilities.
Much easier, surely, to detect what is going on at one of its main suppliers than, say, an engineering works at Gateshead.
Dealers have, therefore, managed to read their own Reuters message - and that, quite clearly, is indicating competition is intensifying and demand slowing. Foreign exchange dealing, representing a big slice of Reuters' revenue, has declined sharply; the urge to merge in the financial sector is dramatically eroding the number of terminals its customers require.
There is also the question of competition. The takeover of ICV by Primark of the US is the latest example of information providers ganging together to make life more difficult for the renowned news agency. And there is the arrival of young start-up groups prepared to undercut the old master. The pound's power is another profit distraction.
No wonder stories circulate that Reuters needs new tricks. Its perceived vulnerability has helped fuel rumours it wants to descend on Dow Jones, the US information group.
Stories from New York suggest some Dow Jones shareholders are getting restless because of its less than sparkling share price performance. One fund manager, with a reputation for making things happen, has built a 5 per cent stake and is noisily agitating for some sort of action.
Reuters, it seems, will not make a hostile strike. It could, however, face a tough task getting the agreement of the Dow Jones management and shareholders loyal to the board. There is a sneaking suspicion Reuters' profits will look quite impressive. Say around pounds 690m, for a gain of pounds 91m on the previous year. But the gnawing fear is that the accompanying statement will be exceedingly cautious and the market, despite its record run, is not prepared to take prisoners. Even after their fall from grace, the shares, which have been richly rewarding in recent years, are still highly rated and there have been many examples of the market's lack of patience with fallen glamour shares.
It is widely believed Reuters' cash mountain has prevented an even sharper decline. The group withdrew proposals to hand back pounds 613m to shareholders in September when it abandoned innovative plans for a special dividend. It now has an embarrassment of riches - more than pounds 1bn - which should point to a bumper dividend payment, perhaps in the form of a special dividend.
The banking profits season is launched on Friday by Lloyds TSB. Financial shares, with banks to the fore, have led this year's blue chip charge which has sent Footsie to new peaks.
Takeovers, real and rumoured, and the knowledge that much of the financial sector is performing well have helped fuel the euphoria. There are fears that any banking disappointment could restrain the market's excitement.
While financials have soared more than 10 per cent this year, general manufacturing and service companies have achieved rather routine gains - nearer 0.3 per cent. Says Richard Jeffrey at Charterhouse Tilney: "Although equities are by no means overvalued at current levels, the upwards momentum that has been evident so far this year is probably a reflection of institutional liquidity".
He expects further progress until the summer when shares will "be ambushed by higher base rates and unsustainably fast growth in the real economy".
BZW sees Footsie at 4,400 points in a year. Richard Kersley and Steve Wright say higher interest rates and earnings slippage are "encouraging us to stick with our defensive stance". But the market "is of course going up".
They add: "While it might feel as if the market is blissfully ignoring the election, it is worth realising that when judged in relative terms, equities and gilts are as lowly valued ahead of this election as the last."
Alan Collins at Redmayne Bentley is one forecaster on target - but far too early. His estimate of Footsie at 4,250 points has already been topped. "In the absence of any Wall Street correction and meaningful rise in interest rates we may well have to repolish our crystal ball and raise our sights," he says.
Lloyds TSB should contribute to any further progress by producing profits around the market forecast of pounds 2.5bn, representing a staggering advance of pounds 850m. The figures will, however, include earnings from TSB, taken over in the final days of 1995. Full ownership of Lloyds Abbey Life should also contribute.
Other heavyweights reporting this week include British Airways, Unilever and British Petroleum. Today BA is expected to produce third-quarter profits little changed at pounds 104m and BP should tomorrow report fourth-quarter replacement cost income of some pounds 700m against pounds 539m. Unilever tomorrow, is set to top pounds 2.5bn, although currency movements could distort the figures.
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